Japanese social gaming companies Gree, Inc. and DeNA both reported excellent financial results in their latest reports: DeNA reported over $1.82 billion USD in sales during the last fiscal year, a jump of 29% compared to last year; and Gree reported net sales in their third quarter (January to March) of ¥46 billion (approx. 575 million dollars USD), a year on year increase of an astonishing 182%.

Despite these very impressive numbers, Gree and DeNA could not reverse the downward slide their stocks took when the Japanese Consumer Affairs Agency noted that the random chance system to obtain in-game items—called “Complete Gacha” due to its similarity to the “gachapon” toy vending machines—might be a form of illegal gambling. This has caused a mass drop of stocks for Japanese corporations who utilize this kind of system in their social games. Other than the two aforementioned companies, this includes Capcom and Konami.

The comments by the Japanese Consumer Affair’s Agency are not legally binding as they’re pending an investigation, but both Gree and DeNA have decided not to wait for the agency’s decision and halted all Gacha-related mechanics in their games.

GREE today announced that it will cease all new releases of “complete gacha” (“comp-gacha”) on all social gaming and other services developed in-house and operated by the Company on its social networking service GREE, effective from tomorrow, May 10, 2012. GREE has also decided to discontinue all other comp-gacha currently in operation by May 31, 2012, following which date it will no longer launch new comp-gacha.

DeNA’s announcement was in their fiscal year 2011 report:

DeNA plans to modify its games to address the current concerns around the “complete gacha” game
mechanic

The pessimism regarding these two companies is well founded despite their impressive growth as they have relied on this mechanic to generate sales, as DeNA CEO Isao Moriyasu stated in an interview with Reuters:

“We do not know if we can maintain the growth that we have enjoyed to this point (without these games)… From here on, we need to properly devise products that are acceptable to society that can also maintain growth.”

Gachpon involves gathering smaller items via random chance. After smaller items are gathered, a larger item can be won also by chance. In one example, items A through D need to be gathered, all via random chance, to gather large item E.

Analysis: Whenever bad news hits a company, stocks usually drop as jittery speculators sell off their stocks but recover what they lost as calmer investors come in and pick up the stock at a cheaper price. So when this one-two combo of Consumer Agency comments and the announcement of Gacha removal hit a company who posts growth percentages in the triple digits yet still can’t pick its stock up, you realize how powerful this punch is.

To realize how serious this is, imagine if Microsoft suddenly couldn’t charge subscription fees for Xbox Live or Blizzard couldn’t charge subscription fees for World of Warcraft. (I’m not insinuating that what they’re doing is illegal, just an example of financial implications.)

So how will Gree and DeNA deal with this? I know that DeNA only introduced the Gacha mechanic in late October 2011, so they could be better off than Gree, who depend on it more. However, DeNA’s quarterly profits were consequentially getting worse in 2011 until they introduced Gacha. If they continue to build on their Mobage social network, they can sustain some steady growth.

Gree are fucked, though. The reason they exploded over 100% in every sector is because of Gacha, so it’ll be interesting to see where they go from here (compared to a more modest 29% for DeNA). They bought Funzio and have collaborations with Ubisoft to produce Assassin’s Creed-licensed mobile and social games, so they do have a chance to continue delivering good results for shareholders.

What they both have to realize is that the age of the easy buck is over, which I feel will do them well in the long run. It’ll prevent them from milking cash cows and becoming irrelevant like many other social game developers.